Secondary Market In Private Technology Companies
Just read about Sharespost on this Mashable piece on the valuation of Facebook and LinkedIn. (for those of you who can’t handle the suspense: Facebook is worth about $4 billion, and LinkedIn about $1.5 billion).
Most of the companies listed are web2.0 companies, many of which you may know. Almost all are Silicon Valley companies, creating a bit of a “local stock exchange” atmosphere. Some alt.energy and biotech firms are listed, as well as Tesla Motors.
There are a few pretty interesting things about Sharespost:
1. You can buy equity in Facebook, LinkedIn or HuffPo, getting in early like those folks who (very very rarely) make a killing on investing in early-stage companies.
2. Sharespost provides the baseline legal agreements to transfer stock, (hopefully) taking much of the cost and hassle out of the transaction.
3. Sharespost creates a secondary market of liquidity, effectively taking advantage of the brutal credit markets and complete shut-down of the IPO marketplace.
4. By showing us the way to create a secondary market, Sharespost opens the door for many other local or specialized secondary markets to emerge. In Boulder, one wonders about how strong a secondary market in the LOHAS companies, Techstars firms or even smaller locally owned businesses would be.
5. Sharespost extends the investing ecology in an interesting new direction. Now, people with the money and time to be angel investors can get into more sophisticated companies. A year ago, nobody could buy $10,000 worth of Facebook, but with just one hungry employee, the opportunity now exists. Will this change the available capital for earlier stage businesses?
6. Sharespost opens company valuations to more scrutiny. Previously, leaders of non-public companies controlled the valuation, market and timing for selling shares. Now that employees and investors can trade shares, we gain access to a new world of valuations and other indicators of company health, as well as potential management distractions for executives, investors and directors.
7. A new mutual fund or related financial instrument might be able to allow direct investment in a wide range of these companies. Although there are likely some hurdles here, it may be easier than it appears.
The marketplace just launched this month, and doesn’t have much activity — yet. Keep a close eye on this one, the full story has not yet revealed itself.
Very cool. If this catches on, it will be interesting to see (1) if the SEC can resist the temptation to step in and regulate this market, and (2) what happens after the first time someone abuses this system and the legal framework gets tested in court.
The folks at Sharespost seem to have covered the obvious regulatory issues…
Nice to see some productive financial innovation. Thanks for this post, Greg!
June 30th, 2009 at 9:28 pmTheir bank charges $2500 for the transaction. For their min purchase of $25k, that’s 10%. Sounds like a non-starter. I’m not sure such high risk investments can handle that kind of drag.
August 4th, 2009 at 10:57 pmThanks, Russ. I didn’t read that “fine print.” Agreed that this is a significant barrier for small transactions. I’m still curious to see how angel investors treat it. The ability to put $100k to work at LinkedIn or Tesla is a different kind of bet than the huge risk of a much earlier stage startup.
August 4th, 2009 at 11:09 pm